Can the world’s most influential business index be fixed?

The World Bank’s “Doing Business" reports, published each year from 2003 to 2020, are a case in point. The annual check-ups gave countries a single score based on various measures, including the ease of registering property, access to credit and enforcing contracts, to determine which were most business-friendly. The index became a gold standard for policymakers and analysts all over the world. Higher spots were fiercely protected by those who had them, and coveted by those who did not.

The project was engulfed in scandal and put on ice in 2021. World Bank staff had come under pressure to fiddle with some countries’ data. An internal probe eventually determined that scores given to China, Saudi Arabia, the United Arab Emirates and Azerbaijan had been manipulated improperly, and judged that the work culture of the team assembling the reports was toxic.

The replacement for the index, Business Ready (B-Ready), was revealed on October 3rd. Gone is the single beguiling table. In its place are three lists, covering regulation, public services and operational efficiency. The report this year covers just 50 economies, owing to the increased burden of assessment, including surveys of almost 30,000 businesses around the world. The number of economies covered is set to rise to around 180 in two years’ time. The report now covers big businesses as well as small and middling ones. And it goes beyond the more focused measurement of how easy it is to operate a business: the assessment now includes a range of “social benefits", from collective-bargaining rights for workers to various measures of environmental sustainability.

Is the new effort an improvement? Beyond the scandal which killed it, Doing Business faced three main areas of criticism. The first was the ability of governments to game it. Countries made small and cosmetic changes to climb up the table. Some even had government units responsible for improving their position. The ranking became a powerful example of Goodhart’s law: once a measure becomes a target, it ceases to be a good measure.

The second problem was the survey’s methodological pitfalls. Doing Business scores were sometimes wildly out of step with other evidence. A study by Mary Hallward-Driemeier and Lant Pritchett of Georgetown University and the London School of Economics, respectively, noted that scores in Doing Business often bore no relation even to the bank’s own surveys of enterprises. Doing Business, for example, suggested that the median time to receive a building permit around the world was 177 days, whereas the bank’s own survey suggested it was 30 days.

The third flaw, and the most difficult to resolve, was the ranking’s inherent subjectivity. In creating any index, decisions must be made on what matters, and why. How important is the uninterrupted supply of electricity, or the enforcement of intellectual-property rights? Other issues are even thornier: how should an international institution like the World Bank approach questions of minimum wages, labour rights or the taxation of capital? These things matter when it comes to running a company, but are subject to fierce political debate, too.

The scorecard in resolving the first two challenges is clearly positive. The data available from the new surveys will be far richer. Whereas many of the Doing Business indicators were based on rules and regulations, B-Ready scores will be more informed by survey data indicating the reality on the ground. Previously, data collection in each country focused on one or two large cities; India’s score was based on results from Delhi and Mumbai. B-Ready will cast a wider net. The change not only makes the evidence collected more likely to reflect reality, but makes it more difficult to game the rankings.

When it comes to subjectivity, the World Bank has opted for a fudge that some will find unsatisfying. In creating three separate indices, it has removed the monomaniacal attention on the single ranking that undermined the former reports. But by combining various social goals (worthy or otherwise) with the bread-and-butter questions about the ease of establishing and running a business, the question of what the aggregates actually seek to measure has become muddier.

Nevertheless, the benefits of the new approach outweigh its flaws. The stronger evidence offered by B-Ready’s extensive surveys is of more value than the World Bank’s own judgment as to which elements are most important. The bank contributes more by collecting and publishing its ample supply of data for free than by deciding how it should be interpreted.

Doing the business

The higher-quality information now available will also be used by all manner of index-builders, from think-tanks to charities, that do not face the same political constraints as a multilateral institution. External indices of everything from economic freedom and tax competitiveness to corporate social responsibility and corruption will be improved by the better evidence the survey provides.

There is another reason to welcome the new approach. Under the old one, the relentless focus on fiddling index rankings may have reduced the appetite for real reforms. Indeed, research by Tamanna Adhikari of the Central Bank of Ireland and Karl Whelan of University College Dublin suggests that an increase in a country’s Doing Business score actually seemed to have at least a short-term negative impact on GDP growth. Eliminating such pernicious incentives alone would make for a substantial upgrade.

Subscribers to The Economist can sign up to our new Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence.

© 2024, The Economist Newspaper Limited. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com